Stock Market Investors Watching the Snow Fall

By: Paul_J_Nolte

Investors seem to be mailing it in for the last couple of weeks of the year. Some buying interest on decent overall economic numbers, but very low volume indicates that many are sitting on their hands awaiting the flip of the calendar. Retail sales were better than expected, however auto sales and slightly higher gas prices did boost sales. The trade picture improved some, while jobless claim rose a bit – so at worst OK economic data.

The part of the market that investors were most concerned about was sovereign debt. Given the decline following Dubai, rumblings about a downgrade for Greece and Spain were raising concerns about another “contained problem” that could rock markets, as was the case a year ago. Consumers felt a bit more upbeat, maybe as the Christmas season is upon us – however we will continue to monitor retail spending to see if they are acting on some of their good feelings. We’ll also get some inflationary data and a check of how busy factories were in November. More comments to come from the Fed mid-week that could shed some light on how long “extended period” is for low rates.

Investors likely spent more time watching the snow fall and shivering during the first real winter blast than actually making investment decisions last week. Volume continues to contract, although there was a tendency for more stocks rising than falling last week making the week as a whole look like a winner while the major average barely budged on the week. The low/slow market activity and very tight trading range (between 1080 and 1120 since 11/9) has made market participants very jittery and focused on those two levels. If the markets break either one decisively (with some volume) we could see a fairly quick 5% move in the direction of the break.

While it may not occur until next year (our guess), the markets are beginning to signal some internal changes as financial stocks begin taking a back seat and technology and healthcare stocks begin to outperform. Energy too has had trouble sustaining significant gains vs. the SP500, even as the dollar fell into early November. The dollar seems to be holding the key for investors and it should be noted that the dollar index has finally broken its downtrend line that has been in place since March – coinciding with the bottom in stocks. We don’t anticipate many fireworks before yearend, however we’ll be watching the betting line.

Since the Fed has essentially anchored short-term rates at zero (holding Treasuries for 3 months gets a whopping 0.05%) investors have been forced to buy longer-dated maturities in hopes of earnings something on their money. But given the scares from other countries outlined above, investors are beginning to demand higher rates for long dated maturities. The current spread between 2 and 30 year bonds was at a record high last week is seen by some as a vote of no confidence in the current fiscal policies of the Obama administration rather than impending inflationary fears. For now, our model points to lower rates ahead, however any minor spike in commodity prices (which have been falling) would turn the model down. How long can the current spreads stay.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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